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 ABOUT THE AUTHORS

N. Gregory Mankiw is Professor of Economics at

Harvard University. As a student, he studied economics
at Princeton University and MIT. As a teacher, he has
taught macroeconomics, microeconomics, statistics, and
principles of economics. He even spent one summer long
ago as a sailing instructor on Long Beach Island.
Professor Mankiw is a prolific writer and a regular
participant in academic and policy debates. His work
has been published in scholarly journals such as the
Kevin LeBlanc

American Economic Review, Journal of Political Economy,

and Quarterly Journal of Economics, and in more popular
forums such as The New York Times, The Financial Times,
The Wall Street Journal, and Fortune. He is also author of
the best-selling intermediate-level textbook Macroeconomics (Worth Publishing).
In addition to his teaching, research, and writing, Professor Mankiw has been a
research associate of the National Bureau of Economic Research, an adviser to
the Federal Reserve Bank of Boston and the Congressional Budget Office, and
a member of the Educational Testing Service (ETS) test development committee
for the advanced placement exam in economics. From 2003 to 2005, he served as
Chairman of the President’s Council of Economic Advisers.

Ronald D. Kneebone is Professor in the Department of Economics and the

School of Public Policy at the University of Calgary. He received his Ph.D. from
McMaster University. Professor Kneebone has taught courses in public finance
and in macroeconomics from principles through to the Ph.D. level, and he is a
two-time winner of the Faculty of Social Sciences Distinguished Teacher Award
at the University of Calgary. His research interests are primarily in the areas of
public-sector finances and fiscal federalism, but he has recently worked on the
problems of homelessness and poverty reduction. He shared with Ken McKenzie
the Douglas Purvis Memorial Prize for the best published work in Canadian
public policy in 1999. Since 2008, he has been Director of Economic and Social
Policy Research in The School of Public Policy at the University of Calgary.

Kenneth J. McKenzie is Professor in the Department of Economics and The

School of Public Policy at the University of Calgary. He received his Ph.D. from
Queen’s University. Specializing in public economics with an emphasis on taxa-
tion and political economy, Professor McKenzie has published extensively in
these areas. He is the winner of the 1996 Harry Johnson Prize (with University
of Calgary colleague Herb Emery) for the best article in the Canadian Journal of
Economics, a two-time winner of the Douglas Purvis Memorial Prize for a pub-
lished work relating to Canadian public policy (1999 with Ron Kneebone and 2011
with Natalia Sershun), and a Faculty of Social Sciences Distinguished Researcher
Award winner at the University of Calgary. Professor McKenzie has taught
microeconomics and public economics from the principles to the graduate level,
and has received several departmental teaching awards.

vi NEL
 BRIEF CONTENTS

About the Authors vi PART 7 SHORT-RUN ECONOMIC FLUCTUAT

A IONS
AT
Preface xvii
14 Aggregate Demand and Aggregate Supply 310
Acknowledgments xxix
15 The Influence of Monetary and Fiscal Policy
on Aggregate Demand 350
16 The Short-Run Tradeoff between Inflation
PART 1 INTRODUCTION and Unemployment 391
1 Ten Principles of Economics 1
2 Thinking Like an Economist 18
Appendix—Graphing: A Brief Review 35 PART 8 FINAL THOUGHTS
3 Interdependence and the Gains from Trade 46
17 Five Debates over Macroeconomic
Policy 422

PART 2 SUPPLY AND DEMAND: HOW MARKETS WORK Glossary 443

4 The Market Forces of Supply and Demand 62 Index 449
Appendix—The Mathematics of
Market Equilibrium 86

PART 3 THE DAT

ATA
AT
TA OF MACROECONOMICS
5 Measuring a Nation’s Income 90
6 Measuring the Cost of Living 112

PART 4 THE REAL ECONOMY IN THE LONG RUN

7 Production and Growth 128
8 Saving, Investment, and the Financial System 153
9 Unemployment and Its Natural Rate 178

PART 5 MONEY AND PRICES IN THE LONG RUN

10 The Monetary System 206
11 Money Growth and Inflation 230

PART 6 THE MACROECONOMICS OF OPEN ECONOMIES

12 Open-Economy Macroeconomics:
Basic Concepts 256
13 A Macroeconomic Theory of the Small
Open Economy 284

NEL vii
 CONTENTS

About the Authors vi 1-3b Principle #9: Prices Rise When the Government
Preface xvii Prints Too Much Money 13
1-3c Principle #10: Society Faces a Short-Run Tradeoff
Acknowledgments xxix
between Inflation and Unemployment 13
1-4 Conclusion 14
Summary 15
Key Concepts 15
Questions for Review 15
Quick Check Multiple Choice 16
Problems and Applications 16

CHAPTER 2
Thinking Like an Economist 18
2-1 The Economist as Scientist 19
© Lavinia Moldovan
2-1a The Scientific Method: Observation,
Theory, and More Observation 19
2-1b The Role of Assumptions 20
2-1c Economic Models 21
2-1d Our First Model: The Circular-Flow Diagram 21
PART 1 INTRODUCTION 2-1e Our Second Model: The Production Possibilities
Frontier 23
2-1f Microeconomics and Macroeconomics 26
CHAPTER 1 2-2 The Economist as Policy Adviser 26
Ten Principles of Economics 1 2-2a Positive versus Normative Analysis 27
2-2b Economists in Ottawa 27
1-1 How People Make Decisions 2 2-2c Why Economists’ Advice Is Not Always
1-1a Principle #1: People Face Tradeoffs 2 Followed 28
1-1b Principle #2: The Cost of Something Is What You 2-3 Why Economists Disagree 29
Give Up to Get It 4
2-3a Differences in Scientific Judgments 29
1-1c Principle #3: Rational People Think at the
2-3b Differences in Values 30
Margin 4
2-3c Perception versus Reality 30
FYI: The Opportunity Cost of Gasoline 5
1-1d Principle #4: People Respond to Incentives 6 2-4 Let’s Get Going 31
In The News: Even Criminals Respond to Summary 32
Incentives 8 Key Concepts 32
1-2 How People Interact 9 Questions for Review 32
Quick Check Multiple Choice 33
1-2a Principle #5: Trade Can Make Everyone
Problems and Applications 33
Better Off 9
1-2b Principle #6: Markets Are Usually a Good Way
to Organize Economic Activity 9 Appendix Graphing: A Brief Review 35
1-2c Principle #7: Governments Can Sometimes Graphs of a Single Variable 35
Improve Market Outcomes 10 Graphs of Two Variables: The Coordinate System 36
FYI: Adam Smith and the Invisible Hand 11 Curves in the Coordinate System 37
Slope 39
1-3 How the Economy as a Whole Works 12 Graphing Functions 41
1-3a Principle #8: A Country’s Standard of Living Depends Cause and Effect 43
on Its Ability to Produce Goods and Services 12 Problems and Applications 45

NEL ix
 x CONTENTS

CHAPTER 3 4-2 Demand 64

4-2a The Demand Curve: The Relationship between Price
Interdependence and the Gains and Quantity Demanded 64
from Trade 46 4-2b Market Demand versus Individual Demand 66
4-2c Shifts in the Demand Curve 67
3-1 A Parable for the Modern Economy 47 Case Study: Two Ways to Reduce the Quantity
3-1a Production Possibilities 48 of Smoking Demanded 69
3-1b Specialization and Trade 50
4-3 Supply 70
3-2 Comparative Advantage: The Driving 4-3a The Supply Curve: The Relationship between Price
Force of Specialization 52 and Quantity Supplied 70
3-2a Absolute Advantage 52 4-3b Market Supply versus Individual Supply 71
3-2b Opportunity Cost and Comparative Advantage 52 4-3c Shifts in the Supply Curve 72
3-2c Comparative Advantage and Trade 53
4-4 Supply and Demand Together
T 74
FYI: The Legacy of Adam Smith and David Ricardo 54
3-2d The Price of Trade 54 4-4a Equilibrium 74
In The News: Does Free Trade Create Jobs? 55 4-4b Three Steps to Analyzing Changes in Equilibrium 76
In The News: Supply, Demand, and Technology 81
3-3 Applications of Comparative Advantage 56
4-5 Conclusion: How Prices Allocate Resources 81
3-3a Should Sidney Crosby Shovel His Own Sidewalk? 56
3-3b Should Canada Trade with Other Countries? 56 Summary 82
Key Concepts 83
3-4 Conclusion 58 Questions for Review 83
Summary 58 Quick Check Multiple Choice 84
Key Concepts 58 Problems and Applications 84
Questions for Review 58
Quick Check Multiple Choice 59 Appendix The Mathematics of Market
Problems and Applications 59 Equilibrium 86
Problems and Applications 89

Lilyana Vynogradova/Shutterstock.com
© Lavinia Moldovan

PART 2
SUPPLY AND DEMAND:
HOW MARKETS WORK PART 3
THE DATA OF
CHAPTER 4 MACROECONOMICS
The Market Forces of Supply and Demand 62 CHAPTER 5
4-1 Markets and Competition 63
Measuring a Nation’s Income 90
4-1a What Is a Market? 63
4-1b What Is Competition? 63 5-1 The Economy’s Income and Expenditure 91
NEL
 CONTENTS xi

5-2 The Measurement of Gross Domestic Product 93 Questions for Review 126
5-2a “GDP Is the Market Value …” 93 Quick Check Multiple Choice 126
5-2b “… Of All …” 93 Problems and Applications 126
5-2c “… Final …” 94
5-2d “… Goods and Services …” 94
5-2e “… Produced …” 94
5-2f “… Within a Country …” 94
5-2g “… In a Given Period of Time” 95
5-3 The Components of GDP 95
5-3a Consumption 96
5-3b Investment 96

© IGphotography/iStockphoto.com
5-3c Government Purchases 96
5-3d Net Exports 97
Case Study: The Components of Canadian GDP 97
5-4 Real versus Nominal GDP 98
5-4a A Numerical Example 99
5-4b The GDP Deflator 100
Case Study: Real GDP over Recent History 101
Case Study: Foreign Ownership 102
5-5 GDP and Economic Well-Being 104 PART 4
THE REAL ECONOMY
Case Study: Measuring Economic Well-Being
in Canada 105
IN THE LONG RUN
Case Study: International Differences in GDP
and the Quality of Life 106 CHAPTER 7
5-6 Conclusion 107 Production and Growth 128
In The News: Identifying the 1 Percent 108
Summary 108 7-1 Economic Growth around the World 130
Key Concepts 110 FYI: Are You Richer Than the Richest American? 131
Questions for Review 110
Quick Check Multiple Choice 110
7-2 Productivity: Its Role and Determinants 132
Problems and Applications 111 7-2a Why Productivity Is So Important 132
7-2b How Productivity Is Determined 133
FYI: The Production Function 134
CHAPTER 6 Case Study: Are Natural Resources a Limit to Growth? 135
7-3 Economic Growth and Public Policy 136
Measuring the Cost of Living 112
7-3a The Importance of Saving, Investment,
6-1 The Consumer Price Index 113 and Stable Financial Markets 136
6-1a How the Consumer Price Index Is Calculated 113 7-3b Diminishing Returns and the Catch-Up Effect 137
FYI: What Is in the CPI’s Basket? 116 7-3c Investment from Abroad 138
6-1b Problems in Measuring the Cost of Living 116 7-3d Education 139
6-1c The GDP Deflator versus the Consumer Price Index 118 7-3e Health and Nutrition 140
In The News: Promoting Human Capital 141
6-2 Correcting Economic Variables for the 7-3f Property Rights and Political Stability 142
Effects of Inflation 119 7-3g Free Trade 143
6-2a Dollar Figures from Different Times 120 In The News: One Economist’s Answer 144
FYI: The Bank of Canada’s Inflation Calculator 120 7-3h Research and Development 144
Case Study: Mr. Index Goes to Hollywood 121 Case Study: Productivity Slowdowns and
6-2b Indexation 121 Speedups 146
6-2c Real and Nominal Interest Rates 121 7-3i Population Growth 147
Case Study: Interest Rates in the Canadian Economy 123 7-4 Conclusion: The Importance of Long-Run
6-3 Conclusion 124 Growth 149
Summary 125 Summary 150
Key Concepts 125 Key Concepts 150

NEL
xii CONTENTS

Questions for Review 150 9-3 Minimum-Wage Laws 194

Quick Check Multiple Choice 151
Problems and Applications 151 9-4 Unions and Collective Bargaining 195
9-4a The Economics of Unions 195
CHAPTER 8 9-4b Are Unions Good or Bad for the Economy? 196
FYI: Who Earns the Minimum Wage? 197
Saving, Investment, and the Financial
9-5 The Theory of Efficiency Wages 198
System 153
9-5a Worker Health 199
8-1 Financial Institutions in the Canadian 9-5b Worker Turnover 199
Economy 154 9-5c Worker Effort 199
8-1a Financial Markets 155 9-5d Worker Quality 199
FYI: How to Read Stock Tables 157 Case Study: Henry Ford and the Very Generous
8-1b Financial Intermediaries 158 $5-a-Day Wage 200
8-1c Summing Up 159 FYI: Minimum, Efficiency, and Living Wages 201

8-2 Saving and Investment in the National Income 9-6 Conclusion 202
Accounts 159 Summary 202
Key Concepts 203
FYI: Financial Institutions in Crisis 160
Questions for Review 203
8-2a Some Important Identities 161
Quick Check Multiple Choice 203
8-2b The Meaning of Saving and Investment 162
Problems and Applications 204
8-3 The Market for Loanable Funds 163
8-3a Supply and Demand for Loanable Funds 163
8-3b Policy 1: Saving Incentives 165
8-3c Policy 2: Investment Incentives 167
8-3d Policy 3: Government Budget Deficits and Surpluses 168
Case Study: The Accumulation of Government
Debt in Canada 171
FYI: How Large Is Government Debt? 173
8-4 Conclusion 174
Summary 175
Key Concepts 175
Questions for Review 175
Quick Check Multiple Choice 176
Problems and Applications 176

CHAPTER 9
Unemployment and Its Natural Rate 178

© Masterfile
9-1 Identifying Unemployment 179
9-1a How Is Unemployment Measured? 180
Case Study: Labour-Force Participation of Men and
Women in the Canadian Economy 183
9-1b Does the Unemployment Rate Measure PART 5MONEY AND PRICES
What We Want It To? 184
9-1c How Long Are the Unemployed without Work? 185
IN THE LONG RUN
FYI: The Employment Rate 186
9-1d Why Are There Always Some People CHAPTER 10
Unemployed? 187
FYI: A Tale of Two Recessions 189 The Monetary System 206
9-2 Job Search 189 10-1 The Meaning of Money 208
9-2a Why Some Frictional Unemployment Is Inevitable 190 10-1a The Functions of Money 208
9-2b Public Policy and Job Search 191 10-1b The Kinds of Money 209
9-2c Employment Insurance 192 10-1c Money in the Canadian Economy 209
NEL
 CONTENTS xiii

In The News: Why Gold? 210 Case Study: Money Growth, Inflation, and the
FYI: Credit Cards, Debit Cards, and Money 212 Bank of Canada 250
Case Study: Where Is All the Currency? 212 FYI: Total and Core Inflation and the Bank
of Canada’s Inflation Target 252
10-2 The Bank of Canada 213
10-2a The Bank of Canada Act 213 11-3 Conclusion 253
10-2b Monetary Policy 214 Summary 253
Key Concepts 254
10-3 Commercial Banks and the Money Supply 215
Questions for Review 254
10-3a The Simple Case of 100 Percent-Reserve Banking 215 Quick Check Multiple Choice 254
10-3b Money Creation with Fractional-Reserve Problems and Applications 255
Banking 216
10-3c The Money Multiplier 217
10-3d Bank Capital, Leverage, and the Financial Crisis of
2007–09 218
10-3e The Bank of Canada’s Tools of Monetary Control 220
10-3f Problems in Controlling the Money Supply 224
FYI: The Bank of Canada’s Response to the 2007–09
Financial Crisis 224
Case Study: Bank Runs and the Money Supply 225
10-4 Conclusion 226
Summary 227
Key Concepts 227
Questions for Review 227
Quick Check Multiple Choice 228
Problems and Applications 228

CHAPTER 11

Thinkstock
Money Growth and Inflation 230
11-1 The Classical Theory of Inflation 232
11-1a The Level of Prices and the Value of Money 232
PART 6
THE MACROECONOMICS
11-1b Money Supply, Money Demand, and Monetary OF OPEN ECONOMIES
Equilibrium 233
11-1c The Effects of a Monetary Injection 235
11-1d A Brief Look at the Adjustment Process 235 CHAPTER 12
11-1e The Classical Dichotomy and Monetary Open-Economy Macroeconomics: Basic
Neutrality 236
11-1f Velocity and the Quantity Equation 238 Concepts 256
Case Study: Money and Prices during 12-1 The International Flows of Goods and
Hyperinflations 240
Capital 257
11-1g The Inflation Tax 241
11-1h The Fisher Effect 242 12-1a The Flow of Goods: Exports, Imports, and Net
In The News: A Recipe for Economic Disaster 243 Exports 257
Case Study: The Increasing Openness of the Canadian
11-2 The Costs of Inflation 244 Economy 258
11-2a A Fall in Purchasing Power? The Inflation Fallacy 245 In The News: Breaking Up the Chain of
11-2b Shoeleather Costs 245 Production 260
11-2c Menu Costs 246 12-1b The Flow of Financial Resources: Net Capital
11-2d Relative-Price Variability and the Misallocation Outflow 261
of Resources 247 12-1c The Equality of Net Exports and Net Capital
11-2e Inflation-Induced Tax Distortions 247 Outflow 262
11-2f Confusion and Inconvenience 248 FYI: The Current Account Balance 264
11-2g A Special Cost of Unexpected Inflation: 12-1d Saving, Investment, and Their Relationship
Arbitrary Redistributions of Wealth 249 to the International Flows 264
11-2h Inflation Is Bad, but Deflation May Be Worse 250 12-1e Summing Up 265
NEL
xiv CONTENTS

Case Study: Saving, Investment, and Net Capital In The News: The Open-Economy Trilemma 304
Outflow of Canada 266
13-4 Conclusion 306
12-2 The Prices for International Transactions:
T Summary 307
Real and Nominal Exchange Rates 268 Key Concepts 307
12-2a Nominal Exchange Rates 268 Questions for Review 308
12-2b Real Exchange Rates 270 Quick Check Multiple Choice 308
FYI: The Value of the Canadian Dollar 271 Problems and Applications 308
FYI: The Euro 273
12-3 A First Theory of Exchange-Rate
Determination: Purchasing-Power Parity 273
12-3a The Basic Logic of Purchasing-Power
Parity 274
12-3b Implications of Purchasing-Power Parity 274
Case Study: The Nominal Exchange Rate during a
Hyperinflation 276
12-3c Limitations of Purchasing-Power Parity 277
Case Study: The Hamburger Standard 277
12-4 Interest Rate Determination in a Small Open
Economy with Perfect Capital Mobility 278
12-4a A Small Open Economy 279
12-4b Perfect Capital Mobility 279
12-4c Limitations to Interest Rate Parity 279
12-5 Conclusion 281

iStockphoto.com/Devonyu
Summary 281
Key Concepts 281
Questions for Review 282
Quick Check Multiple Choice 282
Problems and Applications 282

CHAPTER 13 PART 7
SHORT-RUN ECONOMIC
A Macroeconomic Theory of the Small FLUCTUATIONS
Open Economy 284
13-1 Supply and Demand for Loanable Funds and CHAPTER 14
for Foreign-Currency Exchange 286
13-1a The Market for Loanable Funds 286
Aggregate Demand and Aggregate
13-1b The Market for Foreign-Currency Exchange 289 Supply 310
13-1c Disentangling Supply and Demand in the Market
14-1 Three Key Facts about Economic
for Foreign-Currency Exchange 291
FYI: Purchasing-Power Parity as a Special Case 292
Fluctuations 311
14-1a Fact 1: Economic Fluctuations Are Irregular
13-2 Equilibrium in the Small Open Economy 292 and Unpredictable 311
13-2a Net Capital Outflow: The Link between 14-1b Fact 2: Most Macroeconomic Quantities Fluctuate
the Two Markets 292 Together 312
13-2b Simultaneous Equilibrium in Two Markets 293 14-1c Fact 3: As Output Falls, Unemployment
Rises 314
13-3 How Policies and Events Affect a Small
Open Economy 295 14-2 Explaining Short-Run Economic
13-3a Increase in World Interest Rates 295 Fluctuations 314
FYI: Negative Values of Net Capital Outflow 295 14-2a The Assumptions of Classical Economics 314
13-3b Government Budget Deficits and Surpluses 297 14-2b The Reality of Short-Run Fluctuations 315
13-3c Trade Policy 299 In The News: The Social Influences of Economic
13-3d Political Instability and Capital Flight 301 Downturns 316

NEL
 CONTENTS xv

14-2c The Model of Aggregate Demand 15-2b The Multiplier Effect 366
and Aggregate Supply 317 15-2c A Formula for the Spending Multiplier 367
15-2d Other Applications of the Multiplier Effect 369
14-3 The Aggregate-Demand Curve 318
15-2e The Crowding-Out Effect on Investment 370
14-3a Why the Aggregate-Demand Curve Slopes 15-2f Open-Economy Considerations 370
Downward 319 15-2g Changes in Taxes 377
14-3b Why the Aggregate-Demand Curve Might Shift 321 15-2h Deficit Reduction 378
Case Study: Housing Wealth 321 FYI: How Fiscal Policy Might Affect Aggregate Supply 379
14-4 The Aggregate-Supply Curve 324 15-3 Using Policy to Stabilize the Economy 379
14-4a Why the Aggregate-Supply Curve Is Vertical 15-3a The Case for Active Stabilization Policy 379
in the Long Run 325 15-3b The Case against Active Stabilization Policy 380
14-4b Why the Long-Run Aggregate-Supply 15-3c Automatic Stabilizers 381
Curve Might Shift 326 15-3d A Flexible Exchange Rate as an Automatic Stabilizer 381
14-4c Using Aggregate Demand and Aggregate Supply Case Study: The Recession of 2008–09 (again) 382
to Depict Long-Run Growth and Inflation 327
14-4d Why the Aggregate-Supply Curve Slopes 15-4 A Quick Summary 384
Upward in the Short Run 329 FYI: Interest Rates in the Long Run and the Short Run 386
14-4e Why the Short-Run Aggregate-Supply
Curve Might Shift 332
15-5 Conclusion 387
Summary 387
14-5 T
Two Causes of Economic Fluctuations 334 Key Concepts 388
14-5a The Effects of a Shift in Aggregate Demand 334 Questions for Review 388
FYI: Monetary Neutrality Revisited 337 Quick Check Multiple Choice 389
Case Study: Big Shifts in Aggregate Demand: Two Problems and Applications 389
Depressions and World War II 337
Case Study: The Recession of 2008–09 339
14-5b The Effects of a Shift in Aggregate Supply 341 CHAPTER 16
FYI: The Origins of Aggregate Demand and Aggregate
Supply 343 The Short-Run Tradeoff between Inflation
Case Study: Oil and the Economy 344 and Unemployment 391
14-6 Conclusion 346 16-1 The Phillips Curve 392
Summary 346 16-1a Origins of the Phillips Curve 392
Key Concepts 347 16-1b Aggregate Demand, Aggregate Supply,
Questions for Review 347 and the Phillips Curve 394
Quick Check Multiple Choice 347
Problems and Applications 348 16-2 Shifts in the Phillips Curve: The Role of
Expectations 395
16-2a The Long-Run Phillips Curve 395
CHAPTER 15 16-2b The Meaning of “Natural” 398
The Influence of Monetary and Fiscal Policy 16-2c Reconciling Theory and Evidence 398
16-2d The Short-Run Phillips Curve 399
on Aggregate Demand 350 16-2e The Natural Experiment for the Natural-Rate
15-1 How Monetary Policy Influences Aggregate Hypothesis 401
Demand 352 16-3 Shifts in the Phillips Curve: The Role of
15-1a The Theory of Liquidity Preference 352 Supply Shocks 403
15-1b The Downward Slope of the Aggregate-Demand
Curve 356 16-4 The Cost of Reducing Inflation 406
15-1c Changes in the Money Supply 359 16-4a The Sacrifice Ratio 406
15-1d Open-Economy Considerations 360 16-4b Rational Expectations and the Possibility
FYI: The Zero Lower Bound 364 of Costless Disinflation 408
Case Study: Why Central Banks Watch the Stock Market FYI: Measuring Expectations of Inflation 409
(and Vice Versa) 365 16-4c Disinflation in the 1980s 409
16-4d The Zero-Inflation Target 411
15-2 How Fiscal Policy Influences Aggregate
In The News: How to Keep Expected Inflation Low 412
Demand 366 16-4e Anchored Expectations 414
15-2a Changes in Government Purchases 366 16-4f The 2008–09 Recession 415

NEL
 xvi CONTENTS

16-5 Looking Ahead 416 17-2 Should Monetary Policy Be Made by an

Independent Central Bank? 425
16-6 Conclusion 418
17-2a Pro: Monetary Policy Should Be Made by an
Summary 419 Independent Central Bank 425
Key Concepts 419 17-2b Con: Monetary Policy Should Not Be Made
Questions for Review 419 by an Independent Central Bank 426
Quick Check Multiple Choice 419
Problems and Applications 420 17-3 Should the Central Bank Aim for Zero
Inflation? 427
17-3a Pro: The Central Bank Should Aim for Zero
Inflation 428
17-3b Con: The Central Bank Should Not Aim for Zero
Inflation 429
FYI: Price-Level Targeting 430
17-4 Should Governments Balance Their
THE CANADIAN PRESS/POOL-Fred Thornhill

Budgets? 431
17-4a Pro: Governments Should Balance Their
Budgets 431
17-4b Con: Governments Should Not Balance Their
Budgets 433
FYI: Progress on Debt Reduction? 435
17-5 Should the Tax
T Laws Be Reformed to
Encourage Saving? 435
17-5a Pro: The Tax Laws Should Be Reformed to

PART 8 FINAL THOUGHTS

Encourage Saving 435
17-5b Con: The Tax Laws Should Not Be Reformed
to Encourage Saving 437

CHAPTER 17 17-6 Conclusion 438

Summary 438
Five Debates over Macroeconomic Questions for Review 439
Policy 422 Quick Check Multiple Choice 439
Problems and Applications 440
17-1 Should Monetary and Fiscal Policymakers Try
T
to Stabilize the Economy? 423
Glossary 443
17-1a Pro: Policymakers Should Try to Stabilize the
Index 449
Economy 423
17-1b Con: Policymakers Should Not Try to Stabilize
the Economy 424

NEL
 PREFACE

As soon as we got our hands on the first U.S. edition of Principles of Macroeconomics,
it was clear to us that “this one is different.” If other first-year economics textbooks
are encyclopedias, Gregory Mankiw’s was, and still is, a handbook.
Between us, we have many years of experience teaching first-year economics.
Like many instructors, we found it harder and harder to teach with each new
edition of the thick, standard texts. It was simply impossible to cover all of the
material. Of course, we could have skipped sections, features, or whole chapters,
but then, apart from the sheer hassle of telling students which bits to read and not
to read, and worries about the consistencies and completeness of the remaining
material, we ran the risk of leaving students with the philosophy that what
matters is only what’s on the exam.
We do not believe that the writers of these other books set out with the intention
of cramming so much material into them. It is a difficult task to put together the
perfect textbook—one that all instructors would approve of and that all students
would enjoy using. Therefore, to please all potential users, most of the books end
up covering a wide range of topics. And so the books grow and grow.
Professor Mankiw made a fresh start in the first U.S. edition. He included all the
important topics and presented them in order of importance. And in the seventh
U.S. edition, he has resisted the temptation to add more and more material. We
have, in adapting the text for Canadian students, taken a minimalist approach:
“If it isn’t broken, don’t fix it!” While the book is easily recognizable as Mankiw’s,
we have made changes that increase its relevance to Canadian students. Some
of these changes reflect important differences between the Canadian and U.S.
economies. For example, the Canadian economy is much smaller and more open
than the U.S. economy, and this fact is explicitly recognized in this edition. Other
changes reflect important institutional differences between the two countries,
including the structure of the tax system and the nature of competition policy.
Finally, the Canadian edition focuses on issues and includes examples that are
more familiar and relevant to a Canadian audience.
We would not have agreed to participate in the Canadian edition if we were
not extremely impressed with the U.S. edition. Professor Mankiw has done an
outstanding job of identifying the key concepts and principles that every first-
year student should learn.
It was truly a pleasure to work with such a well-thought-out and well-written
book. We have enjoyed teaching from the earlier Canadian editions and we look
forward to using the seventh Canadian edition. We hope you do, too.

How the Book Is Organized

To write a brief and student-friendly book, Mankiw considered new ways to
organize familiar material. What follows is a whirlwind tour of this text. This tour,
we hope, will give you a sense of how the pieces fit together.

NEL xvii
xviii PREFACE

Introductory Material
Chapter 1, “Ten Principles of Economics,” introduces students to the economist’s
view of the world. It previews some of the big ideas that recur throughout
economics, such as opportunity costs, marginal decision making, the role
of incentives, the gain from trade, and the efficiency of market allocations.
Throughout the text an effort is made to relate the discussion back to the ten
principles of economics introduced in Chapter 1. The interconnections of the
material with the ten principles are clearly identified throughout the text.
Chapter 2, “Thinking Like an Economist,” examines how economists approach
their field of study, discussing the role of assumptions in developing a theory
and introducing the concepts of an economic model. It also discusses the role of
economists in making policy. The appendix to this chapter offers a brief refresher
course on how graphs are used and how they can be abused.
Chapter 3, “Interdependence and the Gains from Trade,” presents the theory
of comparative advantage. This theory explains why individuals trade with their
neighbours, as well as why nations trade with other nations. Much of economics
is about how market forces coordinate many individual production and
consumption decisions. As a starting point for this analysis, students see in this
chapter why specialization, interdependence, and trade can benefit everyone.

The Fundamental Tools of Supply and Demand

The next chapter introduces the basic tools of supply and demand. Chapter 4,
“The Market Forces of Supply and Demand,” develops the supply curve, the
demand curve, and the notion of market equilibrium.

More Macroeconomics
Our overall approach to teaching macroeconomics is to examine the economy
in the long run (when prices are flexible) before examining the economy in the
short run (when prices are sticky). We believe that this organization simplifies
learning macroeconomics for several reasons. First, the classical assumption of
price flexibility is more closely linked to the basic lessons of supply and demand,
which students have already mastered. Second, the classical dichotomy allows
the study of the long run to be broken up into several more easily digested
pieces. Third, because the business cycle represents a transitory deviation from
the economy’s long-run growth path, studying the transitory deviations is more
natural after the long-run equilibrium is understood. Fourth, the macroeconomic
theory of the short run is more controversial among economists than the
macroeconomic theory of the long run. For these reasons, most upper-level
courses in macroeconomics now follow this long-run-before-short-run approach;
our goal is to offer introductory students the same advantage.
Returning to the detailed organization, we start the coverage of macroeconomics
with issues of measurement. Chapter 5, “Measuring a Nation’s Income,”
discusses the meaning of gross domestic product and related statistics from the
national income accounts. Chapter 6, “Measuring the Cost of Living,” discusses
the measurement and use of the consumer price index.
The next three chapters describe the behaviour of the real economy in the long
run. Chapter 7, “Production and Growth,” examines the determinants of the large
variation in living standards over time and across countries. Chapter 8, “Saving,
Investment, and the Financial System,” discusses the types of financial institutions
in our economy and examines their role in allocating resources. Chapter 9,
“Unemployment and Its Natural Rate,” considers the long-run determinants of
NEL
 PREFACE xix

the unemployment rate, including job search, minimum-wage laws, the market
power of unions, and efficiency wages.
Having described the long-run behaviour of the real economy, the book then
turns to the long-run behaviour of money and prices. Chapter 10, “The Monetary
System,” introduces the economist’s concept of money and the role of the central
bank in controlling the quantity of money. Chapter 11, “Money Growth and
Inflation,” develops the classical theory of inflation and discusses the costs that
inflation imposes on a society.
The next two chapters present the macroeconomics of open economies,
maintaining the long-run assumptions of price flexibility and full employment.
Chapter 12, “Open-Economy Macroeconomics: Basic Concepts,” explains the
relationship among saving, investment, and the trade balance; the distinction
between the nominal and real exchange rate; and the theory of purchasing-power
parity. Chapter 13, “A Macroeconomic Theory of the Small Open Economy,”
presents a classical model of the international flow of goods and capital. The model
sheds light on various issues, including the link between budget deficits and trade
deficits and the macroeconomic effects of trade policies. Because instructors differ
their emphasis on this material, these chapters are written so that they can be
used in different ways. Some may choose to cover Chapter 12 but not Chapter 13,
others may skip both chapters, and still others may choose to defer the analysis of
open-economy macroeconomics until the end of their courses.
After fully developing the long-run theory of the economy in Chapters 5 through
13, the book turns to explaining short-run fluctuations around the long-run
trend. This organization simplifies teaching the theory of short-run fluctuations
because, at this point in the course, students have a good grounding in many
basic macroeconomic concepts. Chapter 14, “Aggregate Demand and Aggregate
Supply,” begins with some facts about the business cycle and then introduces the
model of aggregate demand and aggregate supply. Chapter 15, “The Influence of
Monetary and Fiscal Policy on Aggregate Demand,” explains how policymakers
can use the tools at their disposal to shift the aggregate-demand curve. Chapter 16,
“The Short-Run Tradeoff between Inflation and Unemployment,” explains why
policymakers who control aggregate demand face a tradeoff between inflation
and unemployment. It examines why this tradeoff exists in the short run, why it
shifts over time, and why it does not exist in the long run.
The book concludes with Chapter 17, “Five Debates over Macroeconomic
Policy.” This capstone chapter considers controversial issues facing policymakers:
the proper degree of policy activism in response to the business cycle, the choice
between rules and discretion in the conduct of monetary policy, the desirability
of reaching zero inflation, the importance of reducing the government’s debt, and
the need for tax reform to encourage saving. For each issue, the chapter presents
both sides of the debate and encourages students to make their own judgments.

NEL
Discovering Diverse Content Through
Random Scribd Documents
“Aw! you’re silly if you believe a single word they say!” [245]
burst out Tubby, with wrath and indignation; but in less
than two minutes he was as amiable as ever; the
unpleasant incident was forgotten; for Tubby could not
stay out of humor long, and as Hiram was accustomed
to saying, “trouble and anger slipped from Tubby just
like water does from a duck’s back!”

More people were coming as the morning progressed,

though the crowds would not begin to compare with
those that the afternoon and evening would bring;
when the band concerts were an added attraction, with
numerous other events going on in every direction, until
one would wish they could have a thousand eyes and
ears so as not to miss anything.

Rob was tired of the scenes in the Amusement Zone,

and ready to suggest that all of them make a change of
base, though he knew it would not be an easy task to
tear Andy away from the sights his heart yearned to
keep in contact with.

“There’s one of the yellow curs we saw in that Indian [246]

village,” remarked Tubby; “and some boys are plaguing
the life half out of him by throwing sticks, and trying to
round him up. He must have broken loose from the
enclosure where he was confined, and don’t know how
to get back again. Look at the way he acts, will you?
They’d better go slow, or he’ll bite one of those sillies!
Oh, look at him snapping, will you, Rob? Makes me
think of the mad dog that ran through our town last
——”

“Stop that talk, Tubby!” ordered Rob, sternly; but

apparently it was too late, for some one gave a shout,
and like magic the cry was taken up until dozens of
frightened voices sent it rolling along the street of the
Zone:

“Mad dog! mad dog! run for your lives, everybody!”

[247]
 CHAPTER XXI.
THE MAD DOG PANIC.

No more dreadful cry can be imagined than the one the

four scouts now heard rising all around them. It made
many faces turn deathly white, and there was a hasty
flight on the part of the more timid in order to gain the
shelter of the adjoining walls of the booths.

Some boys and men also remained, and commenced to

pelt the wretched cur still further with stones, sticks, or
anything they could lay hands on, meanwhile keeping
up more or less wild shouting.

“The fools!” exclaimed Rob, indignantly; “that dog is no

more mad than I am; but they’re doing everything they
can to make him so. He’s already scared half out of his
head with all those things being shied at him. He snarls
and snaps because he’s at bay, and the old wolf nature
shows then. All he wants is to get back home
somehow!”

The clamor grew in violence as new voices joined in. [248]

Those who came running up, always eager to see
whatever was going on, began to hurl things at the
cringing yellow cur flattened against the wall; though
when the poor beast once started toward them it was
amazing to see how the mob melted away, men falling
over each other in their frantic fear of being bitten.

Rob was growing more and more indignant. He tried to

speak to some of those nearest him, but he might as
well have tried to stop the flow of Niagara for all the
effect his words of expostulation had upon the shouters.

Women and children were shrieking in fright, even

though they were apparently safe in the various
buildings that lined the sunny street of the Zone.

“I just can’t stand for this racket!” the others heard Rob
say, as he suddenly left them and sprang forward.

Immediately loud voices called out, some warning him

not to be rash, and others applauding his daring, for it
is always so easy to stand back and clap hands when
some one is taking the chances.

“Oh! what does Rob mean to do?” cried Tubby, who had [249]
seen the mad dog killed in the main street of Hampton
the previous summer, and had a perfect horror of being
brought into personal contact with any animal suffering
from the rabies.

“He isn’t intending to try and grab the beast!” explained

Hiram. “Rob knows better than that, even if the dog is
only scared, and not mad. It would bite him just as
quick, I guess, as if it was rabid. Watch and see what
his game is, fellows; Rob knows what he’s about, you’d
better believe!”

Every eye was centered on the form of the boy as he

advanced toward the cowering dog. Rob was snapping
his fingers, and acting as friendly as he could, wishing
to assure the beast he had no hostile motive in
approaching. This he did in order to keep the frenzied
and tortured dog from jumping at him before he could
manage to put his little plan into operation.

At least it held the attention of the dog, though the [250]

animal suspected the genuine nature of his advance,
and cowered there watching him, still snarling viciously.

It required considerable nerve to keep on in spite of the

increasing growls of the dog at bay. Rob was ready to
act in case the beast did spring toward him, for he
certainly had no intention of allowing its jaws to come in
contact with his flesh.

Most of the shouting had died out by now. Everybody

was watching with held breath to see what that
venturesome boy in khaki would attempt. Many
doubtless believed, as they stared with distended eyes,
that Rob actually meant to grapple with the animal and
throttle it.

“It’s a burning shame to let a boy try what men might

have done!” one white-faced woman near the other
scouts was heard to say; and they could readily imagine
that she had boys of her own at home, of whom she
was doubtless thinking as she watched Rob walking
forward into the danger zone.

But Rob had another scheme in view. Unarmed, he did

not covet an encounter at close quarters with that
yellow dog, whether the beast was mad or only frenzied
with fear.

In fact, Rob meant to try and cage him, if it could be [251]

worked. He believed that if given a chance the dog
would only too gladly slip in through any opening that
seemed to offer him a temporary refuge from all those
shouting tormentors.

Rob, in taking a rapid survey of the situation, had

noticed what seemed to be a partly finished booth
which was being erected for some late coming
concession owner. The small building was almost
finished, and had a door, which he had seen was ajar,
though not fully open.

It was the boy’s plan, made up on the spur of the

moment, to reach that door and push it wide open.
Then in some fashion perhaps the frightened dog might
be influenced to enter, when the door could be closed,
and thus he would be held in a trap.

Perhaps Rob’s heart beat like a trip-hammer within him

as he came close to that door, and he fancied he saw
the dog starting to jump toward him. He snapped his
fingers again and spoke kindly. It may be these
expressions of good-will had a little effect on the beast;
at any rate the advance movement was delayed, though
the vicious snarling and whining continued.

Then Rob found that he could stretch out his hand and [252]
reach the door. He started to push it open, though it
was no easy task.

Having accomplished this to his satisfaction, he began

to back away, still keeping his eyes on the dog, and
ready to seek some friendly place of safety in case of
necessity.

The dog had seen his action. It must have known that
an avenue of escape had been opened up by the
pushing back of that door. Possibly the poor beast
anticipated a safe return to the village where it had
been at home among its kind.

“Look! it’s going to accept Rob’s invitation!” cried Tubby,

excitedly.

“Smart dog!” said Andy; “he may save his bacon by that
clever move.”

“There he goes in; now what d’ye think of that for a

bright trick?” Hiram shouted.

That was just what the badgered dog did—slipped along

the wall until it came to the partly open door, and then
vanished from view.

“There goes Rob back! What’s he meaning to do now, I [253]

wonder?” Tubby exclaimed, in fresh consternation.

“He wants to complete the job by shutting the door,”

explained Andy, who could grasp a situation like this
much better than the stout scout, because his wits
worked quicker.

All sounds ceased again as Rob pushed along the wall of

the new building until he could reach out his hand. Then
the door began to close, faster and faster until the
yawning gap was entirely filled.

Hardly had this been done than there arose a deafening

cheer. Everybody seemed to be wild with delight, and
shook hands with one another in their excitement. Now
that the terrible “mad dog” had been caged, plenty of
weapons would be remembered; and it would be so
easy, and safe, to shoot through the windows of the
building.
“Let’s get out of this, fellows!” said Rob, when he
managed to worm his way through the crush and join
his mates.

Tubby frowned as though it was against his principles to [254]

run away when people were wanting to shake hands,
and call one a hero; but not wanting to be left behind
the others, Tubby had to go.

They had not reached a point far distant when the

report of several firearms reached them. Rob shook his
head and frowned.

“That’s about the silliest thing I ever ran up against,” he

said. “The dog was no more mad than Tubby here is.
Those boys pestered him, and got him scared. Then all
that shouting and waving of hands and throwing of
things at him finished the business. It was a foolish
scare, and I guess nine out of ten mad dog hunts are in
the same class.”

“Well, they’ve finished the poor thing now, I guess!”

ventured Hiram.

“It sounds like it the way they’re cheering, just as if

they’ve done something mighty heroic!” added Andy.

“The only thing worth a cheer,” remarked Tubby, [255]

emphatically, “was when our chum Rob walked right at
the snarling beast, and took all sorts of chances of
getting bit and clawed up. That needed nerve, let me
tell you!”

“Oh! not any to speak of,” said the scout leader, hastily.
“I made sure to have my eye on a shed close by all the
while; and if he’d really made a jump for me you’d have
seen a mighty fine exhibition of high and lofty climbing.
Mad or not, I wasn’t meaning to stay there and tackle
him, without a thing to hit him with.”

“But it all worked well, as nearly always happens with

you, Rob,” said Tubby; “though once my heart seemed
to be up in my throat; that was when you had to snap
your fingers and coax him, Rob. Only for that he’d have
made for you, thinking you meant to strike him.”

“I’m glad it’s over,” observed Hiram, shuddering.

“That dog belonged to the Injuns we saw in the village,”

ventured Andy, thoughtfully; “and you know Injuns
think roast dog is the finest dish ever. I expect they’ll
want to claim the remains. Little they’ll bother about
any talk of mad dog; it’s more likely to be mad Injun
when they find out what’s happened.”

And after that they tried to put the latest incident out of [256]
their minds, though Tubby would explode some new
idea concerning it every once in a while, as they
wandered about the Fair grounds taking in new sights.

[257]
 CHAPTER XXII.
TAKING IN THE SIGHTS OF THE FAIR.

“Well, he’s gone, Rob!” said Andy, as they were coming

out after an hour spent in the wonderful Transportation
Building.

“Oh, you mean Hiram?” remarked the scout leader, after

taking a comprehensive glance around. “Well, I’ve been
expecting him to give us the slip for some time. He held
on longer than I thought he would.”

“No trouble guessing where he’s bound for,” laughed

Andy. “That hall where the latest modern inventions are
on exhibition draws him like sugar or molasses does the
pesky flies in summer time. He sticks there nearly as
hard as—well, as Tubby did in that skimpy chair at the
Panama show.”

“Bring it nearer home, can’t you, Andy, and say about [258]
as well as you want to stick to that Zone of freaks and
flimsies and Coney Island shows,” ventured Tubby, with
singular quickness, for him.

“I arranged it with Hiram to stay with us just as long as

he could stand for it,” explained Rob; “and that when he
did feel he had to go, to call at the little booth of the
tobacconist where we’ve arranged to meet, not later
than four this afternoon.”

“Remember that, you Andy,” warned Tubby, shaking a

fat finger in the direction of the other, “in case we
happen to get separated! Accidents will come along
sometimes, you know; and you’re likely to feel that call
to the wild again any old time.”

Andy only laughed. Apparently he had a tough hide

when it came to resisting such harmless blunt-nosed
shafts as Tubby could launch against him.

“I’ll keep it in mind, Tubby, I promise you,” he

remarked; “but after we’ve had something to eat, you
won’t try to keep me any longer. We’re all here to enjoy
ourselves according to our bent, you must remember.”

“And your bent runs along the line of the spectacular [259]
display of gaudy tinsel and all sorts of make-believe
frauds!” continued Tubby, pretending to curl his short
upper lip in disdain, though truth to tell he rather
enjoyed a little of the same pleasures himself.

“Have it as you please, Tubby,” Andy told him. “To me

they’re all real, and when I find myself surrounded by
that wonderful foreign atmosphere, it’s just like I’d
taken wings and flown over there to Africa, or Asia, or
the islands of the Far East. Rob, make him stop trying to
interfere with my pleasure. Just because one fortune-
teller riled him, Tubby sneers at everything that wears a
Turkish fez, a Bedouin bournoose or a Persian caftan. I
guess I know how to sift the chaff from the wheat. And
a fellow who means to be a world traveler some day
ought to rub up against these sort of people all he can.”
Tubby gave it up. He knew nothing he could say would
alter Andy’s deep-rooted convictions. Indeed, it was
more to get even with him that the stout scout spoke as
he did.

Later on they hunted up a dining-place where they [260]

could secure a fair meal for their money, at least as
good as was to be expected under the circumstances.

“Now laugh if you want to, Tubby,” said Andy, boldly,

after they had issued forth from the restaurant. “I’m
going to break away, and you know where I’ll be
heading. You keep Rob company the rest of the day.
He’s got a list of things he’s fairly itching to see, and it’s
as long as my arm, at that. Good luck to you!”

He hurried off without waiting to hear what Tubby might

have to say; but the latter only shook his head as he
caught the amused look in Rob’s eyes, and shrugged his
fat shoulders as though ready to give Andy up as
beyond redemption.

“Let him go and enjoy himself as he feels like,”

commented Rob. “That’s everybody’s privilege when
they come to a show as tremendous as this one is. And,
Tubby, I think you’re too hard on Andy. I happen to
know that he’s been devouring every book on travel and
exploration he can find anywhere. The subject fills his
mind.”

“Then he really does mean to make that his life work, [261]
Rob? I thought it was just a sort of cloak, as you might
say, to cover his wanting to see these Oriental humbugs
carry on. Fortune-tellers ought to be suppressed by law;
they do lots of harm, I understand, especially where
silly people believe in ’em.”
Rob came very near remarking that, for one who
scorned their class, Tubby himself seemed to be
bothered considerably over a certain foolish prophecy;
but on second thought he concluded not to add to the
color in the fat boy’s cheeks by embarrassing him.

Being now free from the two chums who had such
peculiar and strong notions as to what they wanted to
devote all their time to, Rob and Tubby started in to
spend several hours to the best possible advantage.

They were not merely seeking amusement, but

instruction as well; and there were copious fountains to
be tapped within the borders of those extensive grounds
of the wonderful Exposition that would repay the laborer
manyfold for his trouble.

“I tell you I’m mighty glad I happened to run across [262]

you, Rob,” Tubby remarked, for perhaps the tenth time,
as they watched the process of the Government fish
hatchery, where millions of eggs were transformed into
tiny objects that looked like animated specks in the
water, but which under proper care would some day be
placed in certain lakes or rivers or in the sea, to add to
the prosperity of the nation that was fast learning how
to conserve its food supplies.

“And I’m just as pleased on my own account,” the scout

leader told him. “You see how my two chums are bound
to desert me, each crazy along his own particular line,
and bound to follow his pet whim through thick and
thin.”

“Haw! then I’m the only sensible one of the lot, seems
like!” grunted Tubby, with beaming face. “Thank you for
intimating as much, Rob. I do seem to fancy many of
the same things that strike you as worth seeing. ’Course
I sort of enjoy the humbug of the Zone, but a little goes
a great way. My better nature craves educational value
for the time spent in coming away out here!”

When Tubby said this so grandly he tried very hard to [263]

keep a straight face; but discovering the gleam of
merriment in Rob’s eyes, he burst into a laugh.

“Well, it’s part way true, anyhow, Rob,” he declared. “I

am having a real good time keeping up with you, even if
we’re walking miles and miles, and my shoes are getting
to pinch me something fierce.”

“Let’s get somewhere and sit down for a spell,” Rob

suggested, for he awoke to the fact that poor Tubby
was not built for getting over acres and acres of ground
with all that flesh to carry along.

“Now, isn’t that queer, Rob; but d’ye know I was just
going to dare you to go me a plate of that ice cream
over there. We can sit at a table and get rested while
we partake of the stuff. Excuse me for calling it that, but
the chances are against getting anything first-class
when you’re dealing with a man who put up an
enormous sum to pay for his concession, and has to get
it back somehow out of the public.”

They spent almost half an hour there, watching the [264]

crowds and resting. Then as Tubby declared he felt
capable again of almost any exertion, they resumed
their sight-seeing walk.

“I notice, Rob, that you’re working around so as to

come on our meeting-place after a while,” suggested
Tubby.
“I was waiting to see if you’d pay attention to that,” the
other told him. “I’m glad to find you did. A scout must
have his eyes on the alert all the while if he wants to
keep up with the procession, Tubby.”

“Oh! I’m improving right along, Rob; my folks at home

tell me that, too. Time was when my favorite occupation
used to be to stretch and yawn. All that’s changed now,
for I yawn and stretch, you see. This scout business
does work wonders, doesn’t it?”

But then everyone knew that Tubby had changed [265]

wonderfully since he joined the troop. Considering the
handicap under which he labored on account of his size,
and the difficulty he had in doing things that were easy
for his chums, he managed to get along tip-top. Rob
always gave him more credit than the rest when an
object they had been laboring to accomplish had been
attained; because the one who overcomes the most
strenuous barriers deserves greater praise than those
who have not been compelled to draw upon their
reserve powers.

They stood there looking up at the vast Triumphal Arch

of the Setting Sun, which, it seemed to Tubby, was the
most beautiful thing in the whole Exposition. It
appealed to him in a way he could hardly explain,
except that something seemed to draw him back there
again and again.

“Why, before you came, Rob,” he remarked, “I used to

just haunt this place, together with the vicinity of the
Column of Progress looking out on the Marino. I’ll see
them in my dreams long after all the other effects of the
Fair have faded away. And I reckon now every visitor
will somehow have a certain thing stay with him
through all time, as a memory of the greatest Exposition
that ever was given.”

“Step back here, Tubby!” said Rob, as he took hold of

the other’s sleeve and drew him swiftly around a corner.

“Why, what’s all this mean?” gasped the stout boy, [266]
looking startled.

“Oh! I saw that hustling newspaper man again,”

explained Rob, “and I was afraid he’d corner us and try
to worm out something of our past.”

“Shucks! is that all?” said Tubby, in disgust. “Why, Rob,

honest to goodness now, if I didn’t think it might be
another mad dog scare we were up against.”

“Well, it was something I dislike almost as much,”

vowed Rob. “And if he ever got you cornered I’m pretty
sure you’d give him all the details about that other little
happening that would make me look silly in the paper.
Now he’s gone, and it’s safe for us to step out.”

Tubby shook his head, and sighed.

“You sure are the queerest fish ever, Rob,” he observed,

with a disappointed air. “I never yet ran across the
fellow who wouldn’t be only too glad to see a write-up
about him in the paper where he was called a hero, and
all that. Why, they’d hurry off to buy a dozen copies,
and mail the same to all the girls they knew. But say,
whenever you do a thing worth mentioning you try to
sneak away as if it was something to be ashamed of.”

“I don’t like it, and that’s the only explanation I can give [267]
you, Tubby. Come, let’s go into this building, and then
half an hour from now it’ll be time to make for our
meeting-place so as to pick up the other fellows.”

“I hope Hiram has made up his mind it’s about due to

spring his surprise on the company he’s come all the
way out here to see and talk with,” Tubby said, as they
started into the building mentioned by Rob.

“I’ve got a hunch that he will, after to-day, Tubby. I

mean to speak with him about it this very night, and see
if it can’t be settled to-morrow. Hiram looks so anxious
every little while it’s too bad he doesn’t take the bull by
the horns and settle the matter once for all.”

When the half-hour was up the two boys issued forth,

and headed in the direction of the tobacconist’s booth,
which was not a great way off. Tubby was again feeling
tired, and seemed pretty well used up.

“We’ll go home as we did last night, right after eating,” [268]

suggested Rob. “Then to-morrow we needn’t hurry
around, for we’ll stay until the gates close at ten, so as
to see the illumination, and the play of the electric
fountains.”

“That suits me first-rate, though I’ve seen all those

things already, and more than once,” the other told the
scout leader.

A few minutes later and Tubby burst forth again.

“There’s the booth we’re aiming for, Rob,” he declared;

“and isn’t that our chum Andy walking up and down like
a tiger in its cage? There, he sees us now, seems like,
and he’s beckoning. Let’s hurry on,” and Tubby actually
forgot that he was tired in his eagerness to learn why
the other was showing such signs of excitement.
“A note from Hiram that he left here for us, fellows,”
Andy hastened to say as the others reached his side;
“and he wants us to chase around there hot-footed,
because there’s something big on the bills.”

[269]
 CHAPTER XXIII.
HIRAM FACES THE MUSIC.

“Read it out, Rob, please,” pleaded Tubby, with round-

eyed wonder.

Thus urged, the scout leader proceeded to oblige.

“This is what he says here,” he announced. “‘Come

around to the aviation field as soon as you possibly can.
Something doing. Guess my chance is knocking at the
door like opportunity that comes once to everybody,
they say. Please hurry!

“‘Signed Hiram.’”

“Do we go, Rob?” gasped Tubby, with intense eagerness

in his whole manner.

“Without losing a single minute!” declared the other.

“Well, I should remark,” added Andy. “We’ve been up to

our ears interested in this affair of Hiram’s from the day
we left home; and we mean to see him through his
troubles to boot.”

“So let’s be on the move,” suggested Rob. [270]

“That suits me,” breathed Tubby. “You see, I’ve gotten
over my tired feeling. There’s nothing can revive a
weary scout half so quick as a chance to get in the
swim. Why, I feel as fresh as a daisy, whatever that can
mean.”

“Well, toddle along with us then, Tubby,” said Andy;

“and take my advice—don’t talk so much when you’re
hurrying; it’s a bad thing, because you need every bit of
breath you c’n get.”

Evidently Tubby realized this fact for himself, because he

subsided from that moment; all they heard from him
were frequent heavy sighs that accompanied his
strenuous efforts to keep at their heels.

They knew the way to the aviation field, and took as

direct a course as possible when aiming for that favorite
portion of the grounds. There could always be found a
large crowd watching the bird-men in their preparations
for going aloft, and making landings after showing what
their airships were capable of doing.

As a rule most of the spectators were debarred from [271]

getting too close to the aëroplanes, for many reasons;
but Hiram had made himself so useful on former
occasions that no one questioned his right inside the
ropes. So also the other three scouts would doubtless
be allowed to loiter near the starting point, where there
were always a dozen or two air-pilots gathered,
comparing notes and joking each other after the
manner of daring adventurers, which all of them
undoubtedly are, since they take their lives in their
hands every time they ascend.
Hiram was waiting for them on the border of the great
throng of deeply interested spectators. They saw
immediately that the inventor scout was very much
worked up over something or other, and naturally all of
the other boys were deeply curious to know what had
happened to excite him.

Hiram was evidently on the lookout for his three chums,

since he beckoned them over as soon as he caught their
eyes.

“Well, we’ve come!” said Tubby, breathlessly, as they

lined up alongside the other.

“Now tell us what’s in the wind!” added Andy,

impatiently.

“Something has happened,” began Hiram, mysteriously. [272]

“You said that in your note,” grumbled Andy.

“The Company,” Hiram continued, “have been waiting

for me to show up, and they’re just so eager to find out
what my stabilizer can do that they can’t stand for the
delay any longer.”

“Great governor! they don’t mean to steal your idea, I

hope?” asked Tubby.

“Oh, no, I guess not!” replied the other, calmly. “You see
they’ve applied it to one of their best machines to give it
a try-out.”

“Bully! that suits you all right!” urged Andy,

enthusiastically.
“I should say yes!” declared Hiram, with a wide grin.
“And if you crane your necks right now so as to rubber
and look up you’ll see that same aëroplane soaring
along there!”

“That monoplane you mean, don’t you, Hiram?” asked

Andy, after all of them had taken a good look to where
the other was pointing.

“Yep, she’s the one, and my stabilizer’s aboard,” Hiram [273]

went on to tell them, with a pardonable touch of pride
in his voice, though he was careful that no one else
should hear him speaking.

“Have they tried it out yet, d’ye know?” inquired Tubby.

“I think the pilot’s just starting in now to see what she

can do,” he was told.

“Oh! Did you see him tumble then?” ejaculated the fat
boy, gripping Hiram’s arm nervously as he spoke.

“That was looping the loop,” explained the inventor;

“lots of pilots c’n do that trick nowadays; why, I’ve
heard that Beachey even makes two complete turns.
That bird-man up there is second only to Beachey, I’m
told. Watch some more of his bold stunts; and hold your
breath, Tubby, for he’ll give you lots of thrills.”

“But I’ve got to breathe, don’t you see,” complained the

fat scout, who was already unduly red in the face from
his exertions in this line.

They watched the aviator go through a number of

hazardous exploits. It was doubtless generally known
among the pilots assembled that he was testing some
new idea, for he seemed to be closely observed by
everybody within the enclosure.

Hiram could see that some of the bird-men were [274]

pleased, for they nodded their heads as they exchanged
remarks. Fancy how this fact thrilled the boy, for it was
his invention that interested these veterans among air-
pilots.

“Now I kind of guess he’s exhausted every trick he

knows, and is goin’ to come down,” said Hiram,
presently. “We’d better be gettin’ inside, for I want to be
as close as I can when he makes his report to the folks.”

Accordingly he led his chums inside the roped

enclosure. He seemed to have made good with the
attendants, for they smiled and nodded to Hiram. That
Yankee “gift of gab” which Hiram possessed was very
apt to get him into the good graces of those upon
whom he chose to exercise it.

The scouts presently found themselves in close touch [275]

with many of the participants in the exhibitions that
were hourly taking place. Here were men famous in
their line, from aviators to makers of machines. Here
also had collected those who were interested in the
future of aviation, and thinking more or less seriously of
embarking in the business.

As may be expected, the talk was “shop” every minute

of the time. No matter what terrible distress the war
over in Europe might be causing, these enthusiasts
could only think and speak of matters that were
connected with the game of rivaling the birds in their
flights. If they mentioned the battles that were taking
place day in and day out, it was only in connection with
the exploits of the aviation corps on the side of the
French, the German, the British or the Belgian armies.

“See that gentleman with the white mustache, the one

that looks like a Kentucky colonel, or an army officer?”
whispered Hiram. “Well, that’s the head of the Golden
Gate Aviation Supply Company, and the person I expect
to do business with pretty soon.”

“He’s a fine looking gentleman, I must say,” admitted

Rob. “I think you’ll have no trouble making fair terms
with him, if I’m any judge of faces.”

“I’m glad to hear you say that, Rob,” breathed Hiram, [276]
with a sigh, “because one minute I think everything
looks rosy, and the next I’m groveling in the dust. But
the agony will soon be over. There, he means to land
this time; get ready to stick by me, because I want to
be near when he climbs out of his seat and meets that
boss of the whole company face to face.”

The monoplane came swooping down, and like a great

bird with wings extended, sailed along close to the
ground, with constantly decreasing speed, as the power
had been shut off.

Now the wheels under the frame had come in contact

with the ground, and a dozen eager hands were
outstretched to bring the machine to a full stop on the
border of the group. This assemblage was being
constantly augmented by fresh arrivals, all eager to pass
the good word with the pilot, and possibly congratulate
him on the fine showing he had just made.

Hiram was looking as sharp as a fox as he strained his

ears to catch every syllable that the air-man uttered.
He leisurely climbed out of his seat and reached the [277]
ground. There was a satisfied smile on his face that sent
a wave of delight to the anxious heart of the waiting
boy, to whom the success or failure of this, his first real
invention, meant so much.

The pilot looked around. He was evidently expecting to

make an immediate report to the gentleman with the
white mustache, and Hiram had been very careful to
keep in close touch with that man.

Yes, the pilot, after exchanging a little badinage with

some of his comrades, immediately pushed directly
toward the spot where the four chums stood. Straight
up to the head of the large firm by whom he was
employed the bird-man strode.

“Well, what is the decision?” Hiram heard the gentleman

say, a note of anticipation in his voice.

“Decidedly favorable, Mr. Curley. In fact, with only one

trial I am convinced that it is going to be the best
stabilizer so far on the market. You have made no
mistake, take my word for it!”

Rob almost feared Hiram was going to faint. He leaned [278]

so heavily against him, as though for the moment his
heart had ceased to beat. And yet, strange to say, the
very first thing the overjoyed inventor did was to turn
and clap his mouth close to the ear of the scout leader
and mutter in trembling tones:

“By jinks! Did you hear that, Rob? Say, I meant to ask
’em just twenty-five hundred cash for the patent, but
she’s doubled in price now. And don’t you think they’ll
pay the five thousand all right, Rob?”
The Yankee in Hiram was on tap, Rob saw with
amusement. At the same time he hastened to assure his
chum that he was well within his rights in demanding all
he thought he could get for his cunning device.

Evidently Hiram had determined to break the ice while

the opportunity lay within his reach. Long had he waited
for this glorious moment to arrive. By day he had
pictured it in a dozen fantastic forms, and while he slept
his dreams must have carried him through numerous
interviews with the powers that swayed the fortunes of
the wonderful Golden Gate Aviation Supply Company.

He pushed forward a little further. If some of those [279]

present noticed the boy in scout uniform they paid little
attention to him, being taken up with what was passing
between the pilot and the builder.

So Hiram managed to squeeze himself along until he

could put out his hand and actually touch the two
central figures in the discussion.

Rob and the other boys were not quite so fortunate, but
being within easy hearing distance, they believed they
would not be apt to miss anything that went on.

They saw Hiram put out his hand and give a tug at the
coat of the fine-looking gentleman with the white
military mustache. The latter looked down and was
apparently annoyed to see that it was only a youth who
sought to distract his attention.

“What do you want, boy?” he was heard to ask,

impatiently.

Then Hiram spoke up. If his voice quavered a little that [280]
was not surprising; indeed, in Rob’s mind the wonder
was that the excited scout could find his tongue at all.

“Do you think, Mr. Curley, that the little stabilizer has
proved to be all that was claimed for it, sir?” was what
Hiram asked.

The gentleman stared hard at him. Others who heard

his question did the same, and Rob saw a smile as of
amusement appear on the bronzed face of the noted
air-pilot who had just come down, after experimenting
with the device, bringing a favorable report; it was as
though he had begun to smell a rat, and realized what a
joke it would be to have a boy invent such an important
appendage to a heavier-than-air flying machine.

“Why, what business is that of yours, may I ask, boy?”

demanded the business head of the big company, as he
continued to stare at the eager, flushed face of the lad
who wore the khaki of a Boy Scout.

“Oh! Because I happen to be the Hiram Nelson you’ve [281]

been corresponding with, sir, that’s all!” said Hiram. “I
used the money you sent me to come out here, but was
a leetle bit afraid to face you. But I guess it’s all right
now, Mr. Curley, because I heard your pilot say the thing
worked fine. That suits me; and I’m ready to talk terms
with you right away!”

[282]
 CHAPTER XXIV.
A BOY SCOUT’S TRIUMPH.

“What’s this you are telling me?” asked Mr. Curley,

quickly. “Have you the proof of what you claim with you,
young man?”

Rob noticed that it was no longer “boy” with the

gentleman; Hiram was evidently climbing in the scales,
and rapidly at that.

“Oh, yes, sir, I’ve got everything to show you; and my

patent right papers are in the hotel safe ready to be
turned over in case we can reach a bargain.”

The gentleman looked hastily around him. There were

representatives of other makers of aëroplanes present
who might endeavor to bid against him if only they
knew he did not as yet have any positive agreement
with the inventor of that successful stabilizer.

“Please say no more until we are in my office, Mr. [283]

Nelson,” he remarked, softly; “and if you have the time
now we might as well adjourn there. I’ll ask a few of my
people to accompany us, as well as this pilot who has
just given your little trick its first try out.”
“I’ll be glad to enter into a talk with you, Mr. Curley,”
declared Hiram; “but I must insist that my friends, who
have come out to the Coast with me, be along.”

He beckoned to Rob and Andy and Tubby, who

immediately started to push their way through the
crowd to where Hiram and the gentleman with the
white mustache stood.

“Certainly, it is only fair that you should have equal

backing with us,” observed the gentleman, whose eyes
twinkled with amusement now, as he began to grasp
the situation, and realize that his company was up
against a boy who knew his rights, and was possessed
of considerable business sagacity, as well as inventive
talent.

Accordingly they all headed for some buildings not a

great ways off, and thus it came that presently the
scouts found themselves behind closed doors with Mr.
Curley and a number of others.

The head of the manufacturing firm was frowning a [284]

trifle, Rob noticed, even if there were times when he
allowed a trace of a smile to steal across his face on
glancing down at the figure of Hiram Nelson. Rob knew
why this should be so, and he considered that it was
only natural.

As a shrewd business man Mr. Curley realized that

Hiram had been too smart for them. Instead of
announcing his presence immediately, and taking what
they chose to offer him for his clever device, the young
Yankee inventor had hung around and waited for the
climax to come. He had heard the favorable report
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